Arla invests to beat CAP squeeze

By Anthony Fletcher

- Last updated on GMT

Related tags Milk powder Milk Arla

Arla Foods' new full-cream milk powder factory underlines how tight
margins are forcing companies to focus on delivering value-added

"We have built an ultra-modern plant which will produce high quality milk powder in a highly efficient way so the factory will provide us with new market opportunities,"​ said managing director Peder Tuborgh.

"The Vimmerby investment is part of our strategy which, to a significant extent, focuses on transforming low margin products to higher margin products through added value."

Powdered milk can be manufactured to different qualities, and the fat content of milk cna also be sold off at a higher price.

The company claims that the DKK 677 million Vimmerby powder factory in Sweden will be Northern Europe's most modern milk powder plant, with a capacity to process 380 million kg milk per year. It also represents one of the Arla Foods Group's largest ever investments.

The move also reflects the need to find new dairy markets. EU CAP reforms have made the dairy industry a significantly harder arena in which to perform strongly - in June, the EU Commission's Milk Management Committee voted to slash refunds on whole milk powder by 16.8 per cent, from €65 to €54 per 100kg, and skimmed milk powder by around 46 per cent, €28 to €15 per 100kg.

Subsidies for other dairy ingredients are also being cut under the EU's Common Agricultural Policy reforms, presenting a challenge to dairy processors like Arla with commodity businesses.

Such cost pressures have resulted in a number of adjustments. Last month for example, Arla Foods announced that it would close a Danish milk powder plant by the end of June next year as part of a cost savings programme. The firm has also decided to cut 44 out of 325 staff and stop production of a number of products at its Akafa factory in Denmark by the end of 2005.

At the same time though, Arla has been looking to uncover new, untapped markets to penetrate. The firm recently signed a joint-venture supply deal for powdered milk with China's leading dairy group in order to exploit one of the fastest-growing milk markets in the world.

"We know we have to do something,"​ Katarena Malström, Arla Foods' communication manager for Sweden told​. "We are just beginning to work with big industries in China, and this factory in Vimmerby will produce milk powder for the international and the domestic market."

The milk sector in China has grown by an estimated 188 per cent over the last five years, according to market research group Euromonitor, with sales of UHT and long-life milk far outstripping those of fresh milk. And China has the lowest per capita consumption of milk in the world - an estimated two litres per year - revealing strong potential for growth.

The investment in Vimmerby therefore represents a risk, but the firm clearly believes that it will benefit by focusing on profitable, value-added segments of the market.

"Decisions about investments of this magnitude during times of some hardship for Arla's co-operative members are always hard,"​ said Arla's deputy chairman åke Hantoft. "Nevertheless, I believe that we have done this at the right time.

"We now benefit from a future-proof plant which will contribute to securing a good milk price for co-operative members like myself."

Milk powder currently accounts for 13 per cent of Arla's turnover in exports markets. The customers are large international food businesses and retail powder distributors worldwide.

The EU's CAP reforms, agreed in 2003, pledged to cut the intervention, or guaranteed minimum, price for butter exports outside the bloc by 25 per cent over four years. The reforms also pledged to chop skimmed milk powder prices by 15 per cent.

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